{"id":160700,"date":"2023-10-13T16:38:18","date_gmt":"2023-10-13T22:38:18","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=160700"},"modified":"2024-02-28T11:14:19","modified_gmt":"2024-02-28T18:14:19","slug":"why-reits-are-not-the-most-effective-investments","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/why-reits-are-not-the-most-effective-investments","title":{"rendered":"The Case Against REITs and Why There Are Better Assets"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC7651861142\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">I recently visited Machu Picchu, and a fellow hiker asked me what I do for work. I explained that I run a real estate investment club and that we pool small amounts of money to collectively buy fractional shares in large apartment complexes. She furrowed her brow and replied, \u201cBut why would I need to bother with all that private equity stuff? I\u2019m already diversified into real estate with REITs in my brokerage account.\u201d&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I cringed at her use of the word \u201cdiversified.\u201d Because for all the benefits of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-are-reits\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">real estate investment trusts<\/span><\/a><span data-preserver-spaces=\"true\">\u2014and there are many\u2014they don\u2019t do the one thing that most investors think they do.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">They don\u2019t provide much diversification from your stock portfolio.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But I\u2019m getting ahead of myself.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Case for REITs<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Don\u2019t get me wrong, I\u2019m no anti-REIT crusader. They offer plenty of advantages for investors, starting with being completely passive. You click a button in your brokerage account and congratulations! You\u2019re done and can go back to your demanding full-time job, family life, and hobbies.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">They don\u2019t cost you an arm and a leg, either. The minimum investment is simply the price of a single share, which could be as little as $10. Compare that to the minimum investment in a rental property or real estate syndication. Either will set you back tens of thousands between the down payment,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/glossary\/closing-costs\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">closing costs<\/span><\/a><span data-preserver-spaces=\"true\">, cash reserves, and initial repairs. For first-time investors, it often takes years to save that much investment capital.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Then comes the liquidity. You can sell shares at a moment\u2019s notice with no transaction cost whatsoever.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Investing in REITs doesn\u2019t require the same knowledge and skill as rental properties. I lost my shirt when I first started investing in rental properties because I didn\u2019t know what I was doing. For REITs, it&#8217;s as easy as investing in a REIT index fund and calling it a day.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Real estate investment trusts have actually performed pretty well over the last half-century, too. Over the 51 years from the start of 1972 through the end of 2022, U.S. REITs have delivered an&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.reit.com\/data-research\/reit-indexes\/annual-index-values-returns\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">average annual return of 11.26%<\/span><\/a><span data-preserver-spaces=\"true\">, including both dividends and price growth. Some REITs pay&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.suredividend.com\/high-dividend-reits\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">yields over 5%<\/span><\/a><span data-preserver-spaces=\"true\">, although high yields often coincide with low growth.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For a more detailed argument, read&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/reits-over-rentals-why-reits-are-a-more-effective-investment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Jussi Askola\u2019s case for REITs here<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">So Why Don\u2019t I Invest in REITs?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The classic argument against publicly traded REITs includes objections like fewer&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-taxes-deductions\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">tax benefits<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;compared to direct ownership, the manager\u2019s hefty cut of profits, and the lack of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/glossary\/leverage\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">leverage<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Those arguments have their merits, which investors can debate. But my objection is simpler, and harder to refute: REITs not only share stocks\u2019 volatility but also a close correlation with their performance.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That correlation means that you don\u2019t actually get much diversification benefit. This is the main reason I invest in real estate in the first place: to counterbalance my stock investments.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Don\u2019t take my word for it. Take a look at how U.S. REITs have performed each year since 1972, compared to the S&amp;P 500:<\/span><\/p>\n\n\n<p><iframe title=\"U.S. REITs vs. S&amp;amp;P 500\" aria-label=\"Interactive line chart\" id=\"datawrapper-chart-DBYj6\" src=\"https:\/\/datawrapper.dwcdn.net\/DBYj6\/1\/\" scrolling=\"no\" frameborder=\"0\" style=\"width: 0; min-width: 100% !important; border: none;\" height=\"400\" data-external=\"1\"><\/iframe><script type=\"text\/javascript\">!function(){\"use strict\";window.addEventListener(\"message\",(function(a){if(void 0!==a.data[\"datawrapper-height\"]){var e=document.querySelectorAll(\"iframe\");for(var t in a.data[\"datawrapper-height\"])for(var r=0;r<e.length;r++)if(e[r].contentWindow===a.source){var i=a.data[\"datawrapper-height\"][t]+\"px\";e[r].style.height=i}}}))}();<\/script><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As an astute investor, you probably asked, \u201cOkay, so what\u2019s the actual correlation between REITs and the stock market at large?\u201d Glad you asked: it\u2019s 0.59, according to a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.morningstar.com\/articles\/942066\/reits-arent-a-true-alternative\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">multidecade study by Morningstar<\/span><\/a><span data-preserver-spaces=\"true\">. That correlation is in line with other sectors of the stock market, such as telecommunications (0.62), consumer staples (0.57), and energy (0.64).<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In other words, you can think of public REITs as one more&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.supermoney.com\/encyclopedia\/sector-breakdown\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">sector of the stock market<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And one that\u2019s just as volatile as the larger market, at that. Consider that last year, the average U.S. REIT delivered a total return of -25.10%, and that includes dividends. Yet the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.zillow.com\/research\/data\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">average residential property price<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;rose 10.49%. That doesn\u2019t include the income yield from rents, which in some markets exceeded&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.mashvisor.com\/blog\/real-estate-cap-rate\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cap rates of 8-10%<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in 2022.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Meanwhile, the S&amp;P 500 fell 18.11% last year. Did REITs provide any protection for your portfolio against a crashing stock market? Absolutely not\u2014quite the opposite, in fact.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How to Invest in Real Estate for Real Diversification<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you want true diversification to balance out your stock investments, you need to step out of the comfort zone of your brokerage account.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That could mean, well, just about any other type of real estate investment beyond REITs. But consider the following three, in order of ease and convenience.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">First, you could invest through real estate crowdfunding platforms. I\u2019ve invested through most of the mainstream platforms if only to gain firsthand experience for reviewing them as a writer. Some have my trust and respect (and a lot of my money), others my skepticism. All provide true diversification from the stock market. You can invest small amounts in some of them, and a few even offer liquidity and short-term investments. Crowdfunding platforms are easy to evaluate through the wealth of third-party reviews online and are entirely passive.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">At the second level of complexity lie real estate syndications. Most of my real estate investment capital sits here. Don\u2019t be intimidated by terms like \u201csyndication\u201d or \u201cprivate equity\u201d\u2014these are simply group investments. You buy fractional ownership in an apartment complex or other large property, such as a self-storage facility, retail center, or mobile home park. And as a fractional owner, you get all the benefits of owning any other property: ongoing passive income, appreciation, leverage, and tax advantages such as&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/beginners-guide-depreciating-investment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">depreciation<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Syndications come with a few challenges, such as finding syndicators and meeting the high minimum investment (often $50-100k). This is precisely the point of our investment club: each member can come up with small amounts of money to collectively reach that high minimum.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">At the highest level of complexity and labor lie direct investment: buying properties yourself. These include long-term rental properties, short-term vacation rentals, flips, and every other direct investing strategy. It takes a ton of skill to consistently earn high returns and a massive amount of labor. But it also comes with enormous rewards, from ongoing passive income to tax benefits and, of course, true diversification from the stock market.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Role of REITs in Your Portfolio<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, how should you invest in real estate? Should you invest in REITs?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I have no idea. It depends on your goals and the rest of your portfolio.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In my portfolio, I invest in real estate as a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/high-inflation-bonds-and-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">higher-return alternative to bonds<\/span><\/a><span data-preserver-spaces=\"true\">. That means I need true diversification from the stock market.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I invest in stocks as long-term growth investments, largely in my retirement accounts. Because I don\u2019t plan to sell any stocks for decades, I don\u2019t care about their volatility. I just invest automatically every week through a robo-advisor, spreading my money among index funds.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Real estate, with its inherent tax benefits and passive income, balances against those stock holdings. The ongoing income helps on my&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rethinking-wealthy\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">journey to financial freedom<\/span><\/a><span data-preserver-spaces=\"true\">. Combined with the low correlation with my stock investments, that means my real estate investments serve a similar role as bonds but with much higher returns.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Most of my real estate investments lie in syndications, as our investment club aims for 15-30% annual returns on them. But I also keep some money in shorter-term real estate crowdfunding investments for easy access in a pinch.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The average investor doesn\u2019t approach their portfolio the same way I do. Most investors just lump stocks and REITs together as \u201cequities\u201d and invest in bonds to diversify against them. If you don\u2019t care about the correlation between your stocks and real estate investments, then by all means, invest in REITs. It\u2019s far easier than investing in rental properties or other real estate investments.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But if you invest in real estate as a counterweight to your stock portfolio rather than a part of it, you need more separation. Look to crowdfunding, syndications, or direct ownership for true diversification\u2014along with all the other fun perks from tax benefits to ongoing income to appreciation and leverage.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_6e35cf9b81412d783c6280457ec03a40\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_a6a7579a2134d11db48c678c0124f68c\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_0d2da1bb41fecf1af88756020d22e4b4 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/agent\/match\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Agent Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/why-reits-are-not-the-most-effective-investments&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/why-reits-are-not-the-most-effective-investments&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Last week, the case was for REITs. This week, the case is against it. Here is investor Brian Davis&#8217; take on REITs.<\/p>\n","protected":false},"author":158586,"featured_media":160703,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4433],"tags":[],"class_list":["post-160700","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/160700","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=160700"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/160700\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/160703"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=160700"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=160700"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=160700"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}